Offshore & Marine - RHB Invest 2019-11-26: Looking For Stronger 2020 Orderbooks


Offshore & Marine - Looking For Stronger 2020 Orderbooks

  • OVERWEIGHT on the offshore & marine (O&M) sector. Keep BUY on all three O&M-related large-cap SGX-listed stocks.
  • Top Pick: Keppel Corporation, with the catalyst being Temasek’s partial share offer as a precursor to future restructuring, particularly of its O&M business. Pending an earnings recovery in the O&M segment, Keppel Corporation can depend on its property wing for earnings.
  • Our second preference: Sembcorp Industries, which has stable energy earnings to cushion the current drag by the weak O&M space.

3Q19 O&M earnings were generally weaker than expected.

O&M orderbook expanding.

  • New contracts secured by Keppel O&M (KOM) YTD amounted to SGD1.9bn (ahead of 12M18’s SGD1.7bn), with close to 60% for LNG and renewables-related projects. KOM’s net orderbook of SGD5.1bn is higher than Dec 2018’s SGD4.3bn. Similarly, Sembcorp Marine recorded YTD new contracts of SGD845m, up 16% y-o-y – including an offshore wind contract, FPSO conversion job and FPU orders.
  • We believe the increase in new orderbook could persist (also factoring in expected stability in crude oil prices) and assume higher new orderbook for 2020 – which augurs well for future O&M earnings for the listcos. Keppel Corporation and Sembcorp Marine’s settlement agreements with Sete Brasil also paves the way for construction completion of some rigs/drillships.

Keppel seeing growth from non-O&M segments.

  • The property division remains the largest contributor to 9M19 net profit at 66%. We see the property segment remaining a major earnings contributor for Keppel Corporation, while KOM’s earnings may take a while to pick up steam. Keppel Corporation’s infrastructure division saw 3Q19 datacentre fair value gains, helping PBT expand 53% to SGD92m.

Settlement agreements with Sete Brasil paves the way for completion of rigs/drillship construction.

  • KOM’s and Sembcorp Marine’s settlement agreements with Sete Brasil paves the path for completion of construction of some (or all) of the rigs, which should help drive revenue and earnings going forward.
  • Keppel Corporation will take over ownership of four uncompleted semisubmersible rigs (which are 40%, 21% and the balance two < 10% completed), and these contracts with Sete Brasil will be deemed terminated, and both parties will waive all rights to claims. Two other rigs (92% and 70% completed) will be sold to Magni Partners, and Keppel Corporation is in talks with Magni Partners to complete the construction works.
  • Sembcorp Marine will retain the title to five of the seven drillships, while the titles to the remaining two (which are in the most advanced stage of construction) will be shared between Sembcorp Marine and Sete Brasil in proportion to payments received by the company from Sete Brasil. Sembcorp Marine is in negotiations with Magni Partners for new contracts to complete these two drillships.

In late Oct 2019, Keppel announced that Temasek is offering SGD7.35/share in cash to acquire an additional 30.55% stake in Keppel.

  • Upon completion, Temasek will own a 51% stake in the company. The intention is for Keppel Corporation to remain listed on SGX. The partial offer can only be made after the pre-conditions (including domestic and foreign regulatory approvals) have been fulfilled or waived, and this may take several months.
  • After the successful close of the partial offer, Temasek intends to work with Keppel Corporation’s Board of Directors to undertake a comprehensive strategic review of the company’s businesses, with the objective of creating sustainable value for all shareholders.

Sembcorp Industries’ renewable energy has strong growth potential.

  • Energy is the largest contributor to Sembcorp Industries’ net profit. The energy business contributed SGD81m to 3Q19 net profit. Due to losses from O&M, Semcorp Industries’ overall 3Q19 net profit was a lower SGD71m.
  • Within the energy segment, Singapore contributed SGD39m (or 55% of overall net profit), while China contributed 37%. The 4Q19 shutdown of some Singapore power generation assets is a negative, but China’s FY19 contribution should be stable y-o-y.
  • Total renewables capacity has risen at a 10% CAGR between Nov 2017 and Nov 2019 to 2,621MW, and is forecast to rise to 4,000MW by 2022 – pointing to growing profit contribution.

Keppel Corp valuation – diversified asset structure with huge value unlocking potential.

  • For Keppel Corporation, we used SOP methodology to obtain a Target Price of SGD7.80, based on O&M division valued at 1.4x FY20F P/BV, a discount to the 5-year average mean of 1.6x P/BV of Sembcorp Marine.
  • Its infrastructure division is valued conservatively at 10x FY20F P/E, and property division valued at 40% discount to RNAV – close to the average discount to RNAV applied for China listed property developers. See Keppel Corp Share Price; Keppel Corp Target Price.

Sembcorp Industries’ Target Price is SGD2.68, based on SOTP valuation.

Better financial flexibility for Sembcorp Marine.

  • Sembcorp Marine secured a five-year subordinated loan facility of SGD2bn from Sembcorp Industries (major shareholder with 61% stake). SGD1.5bn of this was deployed to retire short-term borrowings. The company has since obtained the consent of its bondholders to revise the definition of its debt covenant to exclude the SGD2bn from its net debt to improve its financial flexibility.
  • Our Target Price of SGD1.60 is pegged to 1.47x FY20F BV (0.3SD below 1.6x 5-year mean). We are bullish on the YTD contract wins leading to more contract wins in 2020 and beyond. Trading at c.1.2x FY20F BV, we see limited share price downside. Maintain BUY. See Sembcorp Marine Share Price; Sembcorp Marine Target Price.

Leng Seng Choon CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 7.800 SAME 7.800